Challenges for oil and gas development in the Western Pacific

Competing territorial claims are becoming an increasingly intractable challenge for offshore oil and gas development in the South and East China Seas.

Overlapping territorial claims are contested by China, Taiwan, Vietnam, the Philippines, Malaysia and Brunei in the South China Sea (SCS), and by China and Japan in the East China Sea.

Aside from the significant strategic and political importance of these seas as major shipping routes, fishing grounds and exclusive economic zones, they are also host to large oil and natural gas reserves. This fact elevates the importance of territorial claims to respective claimants, all of which face rising domestic energy demands. China for example is attempting to reduce its dependence on Middle Eastern hydrocarbons, while Vietnam is close to becoming a net oil and gas importer as a result of rising demand and the aging fields.

According to the US, the South China Sea contains approximately 11 billion barrels of oil and 190 trillion cubic feet of natural gas. From China’s perspective, the Sea’s resources are far more substantial, as it estimates oil reserves as high as 213 billion barrels and around 2,000 trillion cubic feet. In addition to its rapidly growing economic and political weight, this is no doubt an important factor behind why China, which claims close to 80 per cent of the South China Sea, has become progressively assertive over its claims in the last two years.

Changing the status quo

Of concern to other claimant states is that Beijing appears to have adopted a long-term strategy of gradually changing the status quo in the region by effectively taking control of disputed territory. To do so it has built on several of the islands and reefs in contested territory of the SCS, has consistently resisted attempts to discuss the issue in multilateral settings, and has used naval flotillas, white-hulled coastguard ships and fishing boats to force the vessels of other claimants out of the disputed waters.

Other countries have tried to take similar moves in asserting their claims. Vietnam’s national oil company, PetroVietnam, signed a number of contracts with Indian oil company ONGC Videsh to cooperate on oil and gas exploration in Vietnam’s exclusive economic zone (EEZ). However, in response China warned India and ONGC not to engage in activities in the area or to intervene in its sovereignty. China’s largest offshore oil explorer, CNOOC, then opened bids to foreign companies for 19 blocks near the disputed Paracel Islands, which overlap with Vietnams territorial claims.

A similar, if not more unstable standoff is taking place between China and Japan in the East China Sea over the Diaoyu or Senkaku islands. The surrounding seabed contains an estimated 60-170 billion barrels oil reserves and 1 to 2 trillion cubic feet of natural gas. Record numbers of Chinese ships now patrol the area and the dispute has become deeply enmeshed in domestic politics of both countries, with no sign of compromise on either side.

Conflict management and outlook

Mechanisms that have previously assisted countries in the region to resolve disputes in Southeast and East Asia, such as ASEAN and the UN, have so far proved ineffective in mediating these maritime disputes. ASEAN is now largely divided between those contesting territorial claims and those prioritising their economic relationship with China. International law and the UN have also been ineffective in resolving tensions. This was demonstrated by China’s straight-out rejection of the Philippines submission for its dispute with Beijing to be adjudicated by the UN, under the United Nations Convention on the Law of the Sea (UNCLOS), in January 2013.

The US has offered a degree of support and moved to increase security and economic ties with the Philippines, Vietnam and Japan, as it looks to re-establish its position in Asia. Yet it has been wary to be drawn too close into disputes with China that do not directly relate to its national interests.

As a result, the South and East China Seas are set to be difficult operating environments with high political risk for the foreseeable future.

Author:Alex Storrie is a political risk consultant specialising in the Asia for AKE, a global security and risk management firm. For more information on AKE’s services please email: intel@akegroup.com or call +44 (0) 20 7816 5454.